DIRECTORS' REPORT

General review of 2007

Both business areas posted higher operating revenues and EBITAs than in 2006. Sales orders were also good for both Kongsberg Maritime and Kongsberg Defence & Aerospace. The Group's backlog of orders was valued at MNOK 12 646 at year end. Kongsberg Maritime accounted for 42 per cent of that amount and Kongsberg Defence & Aerospace for 57 per cent. The results for 2007 include non-recurring items associated with the sale of property and the transition to defined contribution pension plans.

Kongsberg Maritime posted good results and reported a strong influx of new orders. New orders were good in all areas, especially for dynamic positioning and hydroacoustic products where, inter alia, KONGSBERG won a contract in India valued at MNOK 350 for hydroacoustic products. Orders were up by more than 131 per cent from 2006 for Kongsberg Defence & Aerospace. The two largest individual contracts were the framework contract with the US Army for weapon control systems for their CROWS programme and the production contract for the new NSM anti-ship missile with the Royal Norwegian Navy.

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Comments on the result

Non-recurring items

On 21 December 2007, KONGSBERG sold three properties, two of which were under construction. Kongsberg Maritime AS and FMC Kongsberg Subsea AS have signed long-term leases for the properties. The properties were sold for MNOK 1 375, resulting in a gain of MNOK 253 and a cash settlement of MNOK 571.

As from 1 January 2008, all new employees and employees under the age of 52 will be transferred to defined contribution pension plans. This has led to a net reduction in pension liabilities. A positive one-off effect of MNOK 341 was recognised in connection with settlement of the pension plan in 2007. Employees aged 52 and older will remain in the scheme featuring defined benefit pensions.

Growth in sales

The Group posted operating revenues of MNOK 8 306, excluding non-recurring items, up 23.6 per cent from 2006. Both business areas reported growth. Kongsberg Maritime earned operating revenues, excluding non-recurring items, of MNOK 4 850, up 36.5 per cent. Kongsberg Defence & Aerospace reported operating revenues of MNOK 3 338 in 2007, up 11.4 per cent.

EBITA trend

The EBITA, excluding non-recurring items, ended at MNOK 796 (MNOK 464). Both BAs reported growth. Kongsberg Defence & Aerospace posted a profit that was up MNOK 91, thanks to weapon control systems in particular. Kongsberg Maritime's profits improved by MNOK 177. All divisions within this BA posted better results.

Net financial items

Net financial expenses were MNOK 67, up MNOK 9 from 2006. The financial expenses reflect that fixed rates of interest were agreed at a higher level of net interest-bearing debt than what existed at 31 December 2007. The Group has fixed rate agreements on some of its gross liabilities, which amounted to MNOK 400.

Performance

Earnings before non-recurring items and tax were MNOK 685 (MNOK 390), and the profit before non-recurring items and after tax was MNOK 490 (MNOK 252). Ordinary earnings per share before non-recurring items came to NOK 16.17 (NOK 8.30).

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Markets and general operating conditions

Kongsberg Maritime

Orders for new offshore and merchant vessels have reached record levels in recent years. However, 2007 was marked by several shipyard delays as a result of the shipyards' own capacity problems and because of subcontractors that were not able to deliver. KONGSBERG has proven able to accommodate growth and has not been the cause of any delays on construction projects.

KONGSBERG has good market positions and good customer proximity. This means we are well prepared to meet ever keener competition from local competitors, especially in Asia. Norway's maritime industry occupies a strong position, and it is important to the export industry. The Board therefore emphasises the need for an industrial policy that will promote growth and development for the maritime industry.

Kongsberg Defence & Aerospace

In collaboration with KONGSBERG, the Norwegian Armed Forces have developed solutions that have proven highly competitive on the international market over time. It is of great importance to the Group that this cooperation continues. The Group has many new contract prospects at the international level, especially for weapon control systems, air defence, military communications and missiles. The prospects are bright for further development of the market for weapon control systems in the USA.

The new fighter craft could potentially represent Norway's largest defence procurement ever. The Norwegian defence industry depends on importance being attached to negotiating favourable offset agreements in connection with defence spending abroad. The Norwegian Armed Forces' decisions to make major investments with foreign vendors tie up large parts of Norway's defence budget, limiting investments with national suppliers. Norwegian participation in the fighter craft programme is important to ensure defence deliveries that are well adapted to conditions in Norway and to maintain a competitive Norwegian defence industry. A good offset agreement will facilitate this. The Norwegian Government and the Storting (parliament) have both underlined the importance of offset agreements that are in line with international practice. For KONGSBERG, an offset agreement could also translate into orders for several of the Group's nearly 1 500 subcontractors. The Government will submit a proposition to the Storting in late 2008 regarding the procurement of new fighter craft. KONGSBERG has signed a framework agreement with Lockheed Martin and Northrop Grumman for the production of parts in titanium and composite materials for the US aircraft alternative, the Joint Strike Fighter. Both the other contenders, JAS Gripen and Eurofighter, guarantee 100 per cent offsetting. Parts of the guarantees involve the production of components in composite. In any event, an offset agreement in connection with the procurement of fighter craft will translate into more added value and activity in the years ahead.

As part of its positioning prior to the awarding of the fighter craft contract, KONGSBERG has started building a new composite plant. Covering nearly 30 000 m², the facility will be completed in 2008. The composite plant is being built to prepare for offset agreements related to the purchase of new fighter craft. The Norwegian Government has furnished a guarantee which will be triggered if the Norwegian authorities opt not to purchase new fighter craft. The plant will accommodate 350 employees when it is in full operation in about seven years. Predictability in the export regulations for defence materiel and in the way in which the authorities practice them is an important parameter for KONGSBERG.

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Technology and R&D

A substantial percentage of KONGSBERG's added value consists in the development of high-technology solutions for national and international markets. Comprehensive expertise and knowledge sharing are crucial for competitiveness. KONGSBERG's extensive knowledge of dynamic positioning is based on expertise developed in connection with guidance systems for submarines and missiles. The Group's systems and products generally revolve around four core competencies: signal processing, systems integration, engineering cybernetics and software development. KONGSBERG focuses on product development continuously. KONGSBERG's product development accounts for approx. 10 per cent of operating revenues over time. This level is considered necessary for achieving a sufficiently modern, cost-effective product portfolio. In 2007, the Group invested heavily, inter alia, in Offshore & Marine and Subsea in Kongsberg Maritime, and in weapon control systems in Kongsberg Defence & Aerospace.

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Financial situation and capital structure

Cash flow

The cash flow from operating activities for the year came to MNOK 1 015 (MNOK 623) and consists of an EBITDA, excluding non-recurring items, of MNOK 966 and a decrease in tied-up capital for operations-related balance sheet items of MNOK 49. A large part of KONGSBERG's operations consists of delivery contracts featuring milestone payments, meaning that the net cash flow from operating activities will vary from year to year.

Property sales in December 2007 generated proceeds of MNOK 571. In 2007, MNOK 281 was paid for the acquisition of subsidiaries, including MNOK 266 for Sense Intellifield. The Group invested MNOK 432 in tangible fixed assets in 2007. Investments in new buildings and the rehabilitation of existing buildings totalled MNOK 246. The investments in the new composite plant and new engineering workshop accounted for the largest part of the investments in new buildings. In 2007, KONGSBERG bought minor stakes in companies that operate in areas of strategic interest for KONGSBERG. Such investments came to MNOK 134 in 2007. Total net payments related to investing activities were MNOK 338 (MNOK 520).

In 2007, MNOK 300 was repaid on loans and MNOK 75 was paid in dividends. The total cash flow from financing activities was a net disbursement of funds of MNOK 441 (MNOK 128).

Consolidated cash reserves increased by MNOK 236 in 2007 (negative MNOK 25), ending at MNOK 947 (MNOK 711).

Currency

The Group's goal is to limit currency risk by having an explicit foreign exchange (F/X) policy, where a percentage of the Group's orders expected for up to three years in advance is hedged using forward F/X contracts. At year-end 2007, the portfolio of forward F/X contracts and currency options linked to the hedging of project contracts amounted to NOK 3.6 billion, measured at agreed exchange rates. At year-end 2006, these forward F/X contracts had an added value of MNOK 202. All contractual currency flows are hedged upon entry into the contracts. At year end, the portfolio of forward F/X contracts to hedge signed contracts amounted to NOK 5.3 billion, measured in agreed exchange rates. At year-end 2006, these forward F/X contracts had an added value of MNOK 248.

Capital structure

Consolidated equity increased by MNOK 1 074, ending at MNOK 2 758. This results in an equity ratio of 29.9 per cent, an improvement from 2006. The increase is primarily due to the net profit for the year of MNOK 986, which includes one-off effects related to the settlement of the pension plan and the sale of property. At the end of 2007, KONGSBERG had net cash reserves of MNOK 242 (net interest-bearing debt of MNOK 294 at 31 Dec. 2006).

In the light of the Group's long-term perspective, it is natural that the corporation seeks to have satisfactory creditworthiness. Consolidated gross interest-bearing liabilities mainly consist of two bond loans totalling MNOK 700 which are listed on the Oslo Stock Exchange. The Group has a syndicated credit facility of NOK 1 billion that will run until 2013, and which was undrawn at year end.

Pensions

The Group has a service pension plan that covers all the Group's employees in Norway. The plan entitles employees to 65 per cent of their salary upon retirement, including benefits from the National Insurance Scheme until the age of 77, at which time the service pension will be reduced by 50 per cent. The minimum contribution period is 30 years. The pension scheme also includes salary levels beyond 12G, but with a cap of 15G.

As from 1 Jan. 2008, all employees in Norway under age 52 will be transferred to defined contribution pension plans. The effect of settling the benefit-based pension plan for these people came to MNOK 341.

The Group's companies abroad generally have defined contribution plans.

At 31 Dec. 2007, net pension liabilities came to MNOK 336 (MNOK 747). The decline is ascribable to the settlement of pension plans for employees under age 52. MNOK 19 in actuarial gains/losses after tax associated with pensions were credited to equity in 2007.

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Acquisitions

KONGSBERG has made several minor acquisitions in recent years. The acquisitions of 100 per cent of the shares in Norwegian Sense Intellifield, now Kongsberg Intellifield, and 51.2 per cent of the shares in the Polish Shipmedics Ltd., were concluded in 2007. In addition, in December 2007, the Group signed a contract to purchase the assets and operations of Hydroid LLC. This acquisition depends on the authorities' approval. Kongsberg Maritime signed a contract for the acquisition of the simulator company GlobalSim Inc. of the US in February 2008.

Kongsberg Intellifield supplies products and services related to integrated operations to the oil and gas market. The business is engaged in the development, marketing and sale of highly sophisticated systems for real-time remote operation of drilling and production operations for the petroleum industry. Among other products, the company has developed software to retrieve, transport, store and display data from well and drilling services on rigs. The acquisition of Sense Intellifield AS gives KONGSBERG a broader portfolio of products in the rapidly growing market for integrated operations.

The acquisition of 51.2 per cent of the shares in Shipmedics Ltd. gives KONGSBERG access to strong expertise in existing fields, and will also be an important recruitment platform for new employees. KONGSBERG has cooperated with Shipmedics since the company was founded in 2004.

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BA operations and markets

KONGSBERG's two business areas, Kongsberg Maritime and Kongsberg Defence & Aerospace had ordinary operating revenues of MNOK 4 850 and MNOK 3 338, respectively.

Kongsberg Maritime

The business area increased operating revenues by 36.5 per cent since last year. The EBITA was MNOK 506 (MNOK 329), with an EBITA margin of 10.4 per cent (9.3 per cent).

The BA had smooth operations, with improved performance in all divisions compared with 2006. The high backlog of orders provides a sound platform for continued improvement in 2008. The BA experienced improved profitability due to positive market conditions and emphasis on efficient performance. Moreover, profitability was improved by moving some value-added activities closer to customers.

New orders aggregated MNOK 7 218 in 2007, up 63.7 per cent from 2006. At year-end 2007, the backlog aggregated MNOK 5 333 (MNOK 3 054) for delivery from 2008 to 2010, increasing predictability for the segment. Part of the reason why orders are backed up is that shipyard capacity is currently limited. KONGSBERG's systems are installed relatively late in the construction phase and most of the world's shipyards are currently operating with delivery times of several years for new vessels. Kongsberg Maritime's order books reflect this. The BA's backlog of orders has expanded every year since 2002.

The high level of activity within the BA has called for many new employees. In 2007, Kongsberg Maritime hired more than 500 new employees. The company plans to continue hiring in 2008. Some of the hiring will take place outside Norway.

KONGSBERG has fortified its position as a contractor to the oil and gas market. The Group's focus on supplying products and systems for optimising drilling and production processes has yielded good results. The acquisition of Sense Intellifield, now Kongsberg Intellifield, also has helped give KONGSBERG a more distinct profile in integrated operations. The efforts to address the oil and gas market will continue in 2008.

The offshore market is still booming. More than 60 per cent of the BA's new orders came from this market in 2007. As regards floating production, KONGSBERG concluded contracts for the delivery of process automation systems for use on the Skarv and Gjøa oil and gas fields on the Norwegian Continental Shelf.

The Merchant Marine market, including gas carriers (LNG), is maintaining a stable high level. To maintain its strong position in this market, KONGSBERG continues its efforts in Asia. South Korea is currently the world's largest shipbuilding nation, and most of the ships being built there today are commercial vessels. KONGSBERG made further headway in building up operations in South Korea, China and Singapore in 2007. Investments have been made in modern new premises in South Korea and Singapore, increasing its floor space by three-fold.

In 2007, the BA set up operations in India, where it had nearly 50 employees at year end. The new venture will serve a growing local offshore market, and be a resource centre for software programming in the rest of the company.

Kongsberg Defence & Aerospace

Ordinary operating revenues climbed by 11.4 per cent relative to 2006. The EBITA, excluding non-recurring items, came to MNOK 273 (MNOK 182), with an EBITA margin of 8.2 per cent (6.1 per cent). The greatest contributor to the improvement in performance was weapon control systems, which improved profitability as a result of a good market and higher volumes.

The BA booked new orders worth MNOK 7 085 (MNOK 3 071). The two largest individual orders were the NSM production contract with the Norwegian Armed Forces, worth NOK 2.5 billion, and the framework contract for deliveries to the US Army's CROWS II programme, where NOK 1.7 billion in new orders have been placed from a total framework of NOK 8 billion. The Board of Directors also wishes to acknowledge the importance of the contract with the Finnish Navy for the delivery of hydrographic equipment and systems integration. This is an important reference contract for KONGSBERG when it comes to sea mine detection equipment. At year end, Kongsberg Defence & Aerospace's backlog of orders amounted to MNOK 7 232 (MNOK 3 253).

In summer 2007, KONGSBERG and the Norwegian Armed Forces signed a contract for serial production of the NSM missile. The missile is attractive on the market, as evidenced by the joint marketing agreement for a new product custom-made for figher craft, the Joint Strike Missile (JSM). The missile will be deployable on all three of the fighter craft contenders: the Joint Strike Fighter (JSF), the Eurofighter and JAS Gripen. In recent years, the Missile Division has been characterised by the development of the new anti-ship missile, which has been a comprehensive, resource-intensive project. The NSM contract marked a turning point and the outlook for the division is good.

The framework agreement with the US Army for CROWS II makes KONGSBERG by far the pre-dominant and clearly largest supplier of weapon control systems to the USA and the rest of the world. This market also features many other exciting international programmes which will be making procurement decisions in 2008 and in subsequent years. At present, KONGSBERG enjoys a generous share of this market but the competition is becoming keener. As the Norwegian market's largest, most seasoned contractor, KONGSBERG's chances should nevertheless be good for winning contracts with several of the upcoming programmes. Eleven countries have chosen to procure the system thus far. To meet the growing demand for the system, the company is expanding its production capacity in the USA. Staffing will also be increased. Deliveries to the US will largely be manufactured at the facilities in Johnstown, Pennsylvania, using US subcontractors. This will considerably reduce the currency risk inherent in the projects.

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Risk factors and risk management

The Group is exposed to different types of risk, and the Board monitors trends in the various risk areas closely. The Board has established an Audit Committee to help the Board deal with accounting and relevant discretionary items, and to follow up internal control and risk management. At the minimum, the Audit Committee meets in connection with the presentation of the annual and interim accounts.

The Board reviews operational reports on a monthly basis, and the administration draws up quarterly risk reports. The Board is of the opinion that there is a good balance between overall risk and the Group's capacity to deal with risk.

Financial risk

KONGSBERG has centralised management of financial risk. The Board has adopted guidelines for the Group's financial risk management, as embodied in the corporate Financial Policy. KONGSBERG aspires to limit financial risk and increase predictability while exploiting financing as a competitive factor. KONGSBERG is vulnerable to financial risk attached to credit risk, liquidity and refinancing risk, currency risk, interest rate risk and market risk attached to financial investments.

Credit risk is the risk of loss if a customer or another counterpart does not manage to fulfil its contractual obligations. The customer base is well diversified and consists mainly of public institutions and large private sector companies. Historically speaking, the Group has few losses due to bad debts, and the Group's credit risk is considered low.

Liquidity and refinancing risk refers to the risk that KONGSBERG will not be able to fulfil its financial obligations as they fall due. KONGSBERG's goal is to have an average term to maturity on its long-term credit facilities of more than two years. At 31 Dec. 2007, the Group had undrawn overdraft facilities of NOK 1 billion that will run until 2013, in addition to bond loans of MNOK 300 and MNOK 400, respectively, with terms to maturity of 30 March 2012 and 10 June 2009. On 31 Dec. 2007, KONGSBERG had net cash reserves of MNOK 242.

KONGSBERG has considerable foreign currency exposure. The Group's most important trading currencies outside Norway are USD and EUR. KONGSBERG's policy is to limit currency risk while actively assessing various currencies' importance as competitive parameters. The Group hedges all contractual currency flows, as well as parts of the Group's anticipated new orders.

For a more detailed description of the Group's financial risk, see Note 5 "Financial risk management" in the consolidated accounts.

Operational risk

The Group's added value mainly consists of systems of great technological complexity. The deliveries are organised as projects. Project management is an important success factor for reducing operational risk. KONGSBERG has established a project management process based on 'best practices' internally and externally. All project managers undergo an in-house training programme on the project management process.

Projects' earnings are contractualised, so any uncertainty is attached to assessments of remaining costs and the accrual of projects' earnings. The Group has established principles for categorising projects on the basis of their technological complexity and development content. This paves the way for valuations of 'profit at risk' and taking to account the profits from the projects. The profit at risk refers to the profit retained in the projects until the uncertainty has been clarified.

The Naval Strike Missile (NSM) is the largest development project ever undertaken by the Group. The development project is now in the final phase, further mitigating project risk.

Business risk

Business risk is related to market conditions, competitors and other general business conditions prevailing in the markets in which we operate. The shipbuilding market fluctuates over time, impacting KONGSBERG's deliveries of ships' systems. The market is currently expansive, especially in Asia. The competition is growing keener and the shipyards in Asia are increasingly trying to provide a larger share of the value added. The Group is monitoring trends closely and taking strategic initiatives to protect its market position.

The level of investment in the petroleum industry is another important parameter for KONGSBERG. This market is booming. KONGSBERG has maintained its market shares, but the competition is getting sharper.

Insofar as the defence market is concerned, sales with long lead times and large-scale individual projects can lead to fluctuations in activity levels. The Norwegian Armed Forces' development of proprietary solutions in collaboration with Norwegian industry is decisive for continued growth and profitability in the long term.

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Shares and shareholders

KONGSBERG's share price climbed from NOK 175 at year-end 2006 to NOK 339 at year-end 2007. This translated into market capitalisation of MNOK 10 170 at the end of 2007. Including the dividend of NOK 2.50 per share, the return on investments came to 95.1 per cent in 2007. During the same period, the Oslo All-Share Index rose by 11.5 per cent. At 31 December 2007, KONGSBERG had 5 370 shareholders, an increase of 840 from the year before. KONGSBERG had 341 foreign shareholders who collectively held 3.78 per cent of the shares (3.98 per cent). The State, as represented by the Ministry of Trade and Industry, is still the largest owner with 50.001 per cent of the shares. The 10 largest shareholders owned 83.18 (84.05) of the shares collectively.

In 2007, approx. 4.2 million (about 3 million) KONGSBERG shares were traded, divided among 5 158 (1 980) trades. The share's liquidity had a positive trend in 2007, but continues to be at a low level. The company is working actively to promote interest in the share by devoting more attention to investor relations. In summer 2007, the Group's annual employee share programme was conducted for the 11th time. A total of 144 112 (83 987) shares were sold at a price of NOK 168 (20 per cent discount on the market price). A total of 875 (378) employees took advantage of the offer. In addition, another 270 shares were sold to three employees in November. See Note 26 "Share capital and share premium" for a more detailed description of the share programme.

At 31 December 2007, more than 1 000 (750) employees owned a total of about 650 000 (550 000) shares in KONGSBERG. This corresponds to roughly 2.2 (1.8) per cent of the shares.

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Health, safety and the environment (HSE)

The Board ensures that health, safety and the environment are handled in a manner that promotes considerable job satisfaction and a good working environment. One basic principle for working with HSE is that the work should be preventative. Responsibility, commitment and good routines at every level in the organisation are prerequisites for success in this area.

The Board follows up HSE work closely, reviewing the HSE reports every quarter. In 2007, the Group continued to devote special attention to HSE training for line supervisors and safety representatives, as well as to continuous improvement of HSE policy and processes in the BAs. The reporting routines of the foreign subsidiaries are now good, allowing us to include figures from the international offices on absence due to illness and work-related accidents in the HSE report.

In 2007, there were a total of 28 (24) work-related accidents in the Group. Of that number, 22 (7) were minor accidents that required no treatment or follow up. Six of the accidents required medical treatment (12 in 2006). In 2007, there were 11 near-accidents that required follow up, compared with three reported in 2006. One accident (2 in 2006) was classified as a high-risk incident that led to changes in routines. No occupational diseases or work-related fatalities were recorded in 2007. Total work-related accidents entailed 42.8 lost working days that required medical certificates. Total absence due to illness was reduced from 2.7 per cent in 2006 to 2.4 per cent in 2007.

HSE work is done in the individual BAs. During 2006, the Group entered into collaboration with Help 24. As from 1 January 2007, Help 24 is the designated supplier of company health services for all our business operations in Norway, where Help 24 offers services of satisfactory scope and quality. All employees in Norway have access to company health services. This varies in accordance with local practices and legislation for the foreign business activities.

KONGSBERG has 802 employees outside Norway. KONGSBERG's growing international presence requires more attention to and insight into HSE issues in the countries in which we operate.

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Personnel and organisation

Continuous efforts are made to adapt the organisation to KONGSBERG's markets. At 31 December 2007, the Group had 4 205 employees, 802 of whom worked outside Norway. Kongsberg Maritime and Kongsberg Defence & Aerospace had 2 510 and 1 595 employees, respectively, at year-end. The parent company, Kongsberg Gruppen ASA, had 39 employees.

Competition is keen for good engineer resources in Norway, but despite this, the Group had satisfactory access to expertise in 2007. The Group is taking this into account in connection with the establishment of new ventures outside Norway. Hiring locally is cost effective at the same time as it helps us fit into the local community. One of the Group's goals is for the foreign companies to be staffed by local employees insofar as possible.

One important prerequisite for long-term success is that KONGSBERG manages employees' expertise in a satisfactory manner. To enhance the Group's ability to revitalise and improve decision-making processes, the goal is to cultivate diversity so that people of different backgrounds, cultures, educations and ways of thinking are represented. Active efforts are made to exchange expertise and employees between the BAs. Offering good development opportunities is an important policy instrument for recruiting and retaining employees.

KONGSBERG works continuously with human resource development. The Kongsberg School facilitates and coordinates courses and training programmes. In August 2006, we initiated the project 'Leadership at KONGSBERG'. The mandate was to further develop KONGSBERG's leadership principles and practices. A joint resource group is working to develop qualified leadership talent. The resource group offers a portfolio of leadership programmes through the Kongsberg School.

At year end, there were 821 women (19.5 per cent) employed by the Group (19.2 per cent in 2006). Of the total number of managerial positions in the Group, 86 (13 per cent) were occupied by women (12 per cent in 2006). The percentage of women recruited to the Group is on a par with the percentage of women educated in the areas of technology that are most common at KONGSBERG. Generally speaking, there are still too few women in senior managerial positions so KONGSBERG will continue to strive to increase the percentage of female leaders and to promote the recruitment of women to technical positions. As for the Board of Directors, two of the five shareholder-elected directors are women.

Cooperation is good with the trade unions through the established cooperation and co-determination schemes, making invaluable contributions to the development of the individual companies and the Group as a whole. The Board would like to thank all employees for their dedicated efforts and contributions to strong progress for the company in 2007.

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Corporate social responsibility and the environment

The Board of Directors emphasises that KONGSBERG is to operate in an ethical, environment-friendly and socially responsible manner. KONGSBERG aspires to achieve sustainable development, i.e. to strike a good balance between financial results and corporate social and environmental responsibility. The Board focuses on compliance with the Group's Policy for Corporate Social Responsibility, its Environmental Policy and the corporate Code of Ethics. In 2007, a new strategy was drawn up for the Group's work with social responsibility. The Policy for Corporate Social Responsibility and the Environment were evaluated and revised in early 2008. This was motivated by the Group's growing international expansion and the increased attention being devoted to issues related to corporate social responsibility.

KONGSBERG's activities mainly consist of the development of software and systems integration. The Group is only marginally affected by environmental regulations. Notwithstanding, it is important to the Board that the Group concentrates on pro-active environmental initiatives. These have largely involved energy conservation associated with the Group's premises, as well as source separation.

For a more detailed description of the Group's work with corporate social responsibility and the environment, please see the Sustainability Report at the back of this report.

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Corporate Governance

Good corporate governance and leadership will ensure optimal value creation, at the same time as the Group's resources will be used in an efficient, sustainable manner. The value added should benefit shareholders, employees and the community. The Board attaches importance to reviewing the Group's corporate governance documents annually and updating them to comply with the "Norwegian Code of Practice for Corporate Governance" insofar as possible. The description on the section "Corporate Governance" is based on the latest revised (4 Dec. 2007) version of the Norwegian Code of Practice for Corporate Governance.

For a discussion of remuneration to the directors and the CEO, see Note 32 to the consolidated accounts.

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Prospects for 2008

KONGSBERG's maritime markets remain buoyant. The efforts aimed at the offshore market will continue in 2008. As regards the market for commercial vessels, shipyards are generally running at capacity and delivery times for new vessels are therefore long. KONGSBERG expects a somewhat slower pace of contracting new vessels at the shipyards in 2008, combined with an increase in after sales and customer support.

Kongsberg Defence & Aerospace expects a strong influx of new orders once again in 2008. The good order situation in the market for weapon control systems is expected to continue. Besides possibilities in new countries, there are also good opportunities in countries that have already signed contracts for the system. A persistently low USD exchange rate may present a challenge in the long term. Initiatives have been put into place to reduce the Group's currency exposure. Besides hedging all signed contracts, we have hedged parts of anticipated new orders (MNOK 769 in USD at 31 Dec. 2007 for new orders expected in 2008).

Operating revenues and the profit before non-recurring items are expected to be better in 2008 than in 2007. A strong influx of new orders, combined with the large backlog of orders, is expected to offer a good platform for continued growth.

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New CEO

Jan Erik Korssjøen, who has been CEO of KONGSBERG since 1999, opted to retire on 1 March 2008. The Board of Directors would like to take this opportunity to thank Mr Korssjøen for the excellent work he has done during nearly nine years at the helm of the company. The Board has named Walter Qvam as Mr Korssjøen's successor. Mr Qvam has extensive experience of the management of Norwegian and international companies in several industries. He took over as CEO on 1 March 2008. The Board of Directors welcomes Walter Qvam to KONGSBERG.

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Net profit and allocations

The parent company Kongsberg Gruppen ASA posted a net profit of MNOK 173 in 2007. The Board of Directors proposes the following allocations for Kongsberg Gruppen ASA:

Dividends	MNOK	150
Transferred to other equity	MNOK	23
Total allocations	MNOK	173

The proposed dividends are equivalent to some 30 per cent of this year's profit before non-recurring items.

At 31 December 2007, distributable reserves totalled MNOK 395.

Kongsberg, 11 March 2008

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